Barnes Buchanan Conference offers alarm industry insights

The most encouraging financial news that I have heard in months came from the Barnes Buchanan (financial) Conference in West Palm Beach, Fla. earlier this month. I arrived to a buzz of enthusiasm, to be told that attendance was the best ever. Mike Barnes, principal of Barnes Associates Inc., in St. Louis and Bryan Lawrence, an attorney with the Pittsburgh office of Buchanan Ingersoll & Rooney, in unison assured me that the banking community was there in force. Since 1986, Barnes' firm has been involved in more than 230 alarm company acquisitions and financings-- an aggregate transaction value in excess of $5 billion.

The Barnes Buchanan Conference is a boutique financial conference that draws a very dynamic group of bankers and brokers who provide funding to alarm companies and monitoring businesses. For the most part, these players keep a pretty low profile in the industry, albeit their dollars turn the wheels behind much of the day to day operations on the RMR (recurring monthly revenue) side of the security business. Also present were the CEO’s and presidents of well known, high-profile alarm sales and installation companies and alarm monitoring companies including Protection One, ADT, ASG and Monitronics, just to name a few, as well as an established regional alarm company opening their own central station for their customers and a residential alarm company with a unique product offering. They came to develop the funding needed to grow their businesses, to continue their work with the banking partners, and to keep up with what’s happening in the market. Barnes has been benchmarking the health, transactions and operating metrics of alarm monitoring since the 80s and the community at large uses his data as their guide to properly measure the operating costs of a company.

"I started Barnes Associates in late 1985, 23 years ago," Barnes said. "After several merger and acquisitions deals it became obvious to me that the industry didn’t fully understand the operating dynamic of the typical security alarm company. The big insight was that these companies have two distinctly different operating functions: 1. the monitoring and service of existing customers and systems; 2. the sale and installation of new customers and systems. While these are interrelated (i.e. more sales typically yields more RMR…depending upon attrition), it became obvious that modeling the financial and operating performance required each of these activities to be estimated, projected and analyzed separately."

More importantly what Barnes discovered in doing this research was that that "the vast majority of the industry actually lost money on the sales and installation activity--particularly when G&A costs (General & Administrative (expense)) and overhead was properly allocated to this (correct) activity, and any accounting treatments are unwound…such as capitalizing (to make the most of) some or all of the direct costs."

This created a significant strain in the M&A (mergers and acquisitions) market for obvious reasons. The unwillingness to just accept this information is what "morphed into our more comprehensive benchmarking program and capability as we continued to measure this information annually," Barnes added.

During the economic slowdown in the early 90s Barnes enhanced his research because funding simply became less available. In reaction to this, Barnes continued, "we did three things: continued to document the performance envelope of alarm companies; formally tracked all transactions in the industry correlating them to the performance metrics; and looked for a way to more easily educate the capital markets, particularly potential new lenders to the industry, about the industry. This last point resulted in our co-founding the Barnes Buchanan conference in 1995."

Barnes has recorded what happens to alarm and alarm monitoring companies when the economy rises and falls and he’s measured the impact that this has on their actual profitability throughout these years. He’s been able to show that historically speaking the RMR business remains reasonably stable in tougher times. This does not mean recession proof. But his data gives the banking industry some sense of what to anticipate in slowed times.

At the event you could see closed door meetings and hushed conversation among buyers and bankers…along with bold stories of large sums of money that was recently secured--as recently as the last few months and weeks. There were smiling faces, public thank you’s to lenders for sums provided and a general positive attitude, no excitement for what was happening in the market. The tenor felt was as palpable as the events of the last so many high growth years. This does not mean to imply that cash flows freely or easily but for solid, profitable companies in the RMR business there was/is money to be had.

Bill Polk, Managing Director of CapitalSource, a lending institution in the security industry, gave the most articulate explanation of the banking situation in the U.S. today, of any I’ve heard to date…and who of us has not heard a thousand of these by now. Bill admits that we, the U.S., are in uncharted waters and no one can say for sure what will happen. He’s not convinced that we have hit the bottom, as more layoffs are expected and these impact the alarm industry as shuttered businesses mean less monitoring and residential customers without jobs may not prioritize or be able to pay for their alarms.

Polk thinks, as others do, that there are markets that will remain more viable than others such as healthcare, transportation, petrochemical, education and government systems including police, towns, municipalities and or industries who serve the masses. I myself might throw in pharmaceuticals, grocery stores, food manufacturers and their supply chains, warehouses, liquor store and cigarettes companies. I am sure you too can come up with a few. Polk points out that when the economy goes down, crime goes up…and this is where we come in. John Murphy, President of Vector Security, a long established retail security solutions provider noted that retailer’s loss increases in these times and their assets are all they have.

Barnes, nor Polk nor anyone at the event was ready to hang their hat on what to expect for security revenues in the coming year. It’s been a tradition for Barnes to make predictions and to see how close he would come when he rolled out the numbers in the following year. He was truly hesitant to say what he thought this year. He vacillated wanting to say flat then mumbled perhaps a little bit down, but you could see that he was not pessimistic like the national media. Nor was he trying to be unrealistic. If you put all of this in perspective, the security industry grew significantly last year and it was estimated to be about $48.5 billion in revenue. If we stayed flat, or even dipped a little, this would likely not even take us back to the operating numbers of ’07.

In summary what I see here is that who is up, down or flat has a lot to do with how you organize your business, your operations, your sales, service and RMR if you have it. The proper and accurate tracking of your cost of operations, profits and losses is the key to success in any economy but right now more so than ever. Isn’t this the exactly the issue that we hear about all day everyday in the national media and is the true problem behind all of this economic trouble. If you are counting what’s real from the beginning, then a slowdown is just a slowdown. If you have been doing some fuzzy math, then you have to count your losses and your bad accounting system. If you have been counting correctly from day one, you are just not in as much trouble as those who have been manipulating their numbers.